The IRS Large Business and International Division (LB&I) is rolling out thirteen new campaigns to audit specific kinds of taxpayers.
When the commissioner of the LB&I Division announced these campaigns on January 31, the country and the media were slightly preoccupied with events at both ends of Pennsylvania Avenue. But over at 1111 Constitution Avenue (the IRS National Office) the campaign wheels were set in motion. The IRS has announced that it will begin a new way of selecting which taxpayers to audit. The plan is intended to more effectively deploy its auditing resources.
Tax professionals are eagerly signing up for the first of a series of webinars—next Tuesday, March 7, at 2:00 p.m. EST, sponsored by the KPMG accounting firm. Here is where to register.
The webinar notice says IRS officials will explain what taxpayers can expect from the enforcement campaign. We expect that any effort of this nature is bound to result in some difficult IRS audit experiences for innocent taxpayers who simply fit the profile.
The profiling is explicit—the IRS has apparently decided these 13 categories of taxpayers are high-value targets, in the sense they present a greater-than-average likelihood of having underpaid taxes. They also appear to be low-hanging-fruit, in the sense that the universe of suspects can readily be identified by the IRS on the basis of public information or confidential information already in its files.
The targeted groups are:
- Sec. 48C Energy Tax Credit—improper credit claims by taxpayers who failed to secure advance approval from DOE and IRS
- OVDP—individuals who applied for the Offshore Voluntary Disclosure Program but later changed their mind and withdrew
- Sec. 199 Domestic Production Activities Deduction—improper claims by businesses that they produce “qualified films”
- Micro-Captive Insurance—abuse of the Sec. 831(b) exemption for premium income of small non-life insurance companies
- Related Party Transactions—improper avoidance of corporate income tax by mischaracterizing payments to related individuals and pass-through entities
- Life Insurance and Annuity Reserves—resolving uncertainties regarding how much life insurance companies may deduct when establishing reserves for life insurance and certain deferred variable annuities
- So-called “Basket Transactions”—improperly classifying the income from certain financial derivatives as long-term capital-gain.
- Real Estate Developers—improper use of the completed contract method of accounting by developers of residential communities
- Upper-Tier Partners—Developing new methods of identifying additional investments by upper-tier partners who have been assessed for noncompliance in one or more partnerships
- S Corporations—improperly claiming tax losses in excess of shareholders’ basis.
- Tax-Free Repatriation —the use of certain (unspecified) structures to improperly repatriate funds into the U.S. without reporting them as taxable
- Foreign Corporations—the IRS will begin using “various external data sources” to identify foreign corporations doing business in the U.S. without filing tax returns.
- U.S. Distributors of Imported Goods—improper transfer-pricing of imported goods to understate profits taxable in the U.S.
We will continue to follow and report on these developments.